Capital-Gains Cut Would Have Minimal Effect Locally, Economist Says

By Eric Smith

The National Association of Manufacturers and other groups are proposing a cut to the long-term corporate capital-gains tax, but how much that move would directly benefit Memphis' manufacturing businesses remains unclear.

In a report this week by the Associated Press, executives with NAM, a Washington-based trade group, said they want the long-term corporate capital-gains tax cut from 35 percent - where it has stood since 1986 - to 15 percent.

Proponents say the reduction would assuage concerns over a recession and boost the U.S. economy, especially in the manufacturing sector.

But that would address only a portion of the current economic slump, said Dr. John Gnuschke, director of the Sparks Bureau of Business and Economic Research/Center for Manpower Studies and an economics professor at the University of Memphis.

"On the margin, the corporate capital-gains tax cut might accelerate the pace at which corporations react to market conditions," he said. "Tax reductions will make some transactions feasible that were not in the past. That may be the primary advantage of a capital-gains tax cut. Capital-gains tax cuts will have a small impact on the issue of providing a short-term stimulus to the economy."

Representatives from local manufacturing companies resisted discussing the proposed cut. Pat McFadden, director of government affairs for Nucor Corp., which is building a steel mill on Presidents Island, declined comment ,as did others in town.

But what's clear is that Memphis' manufacturing role has diminished over time, with companies such as Schering-Plough Corp. sending manufacturing operations elsewhere.

Instead, the city has evolved into a more diversified economy - particularly in the logistics and distribution realms - meaning Memphis might not feel the immediate impact of a capital-gains tax cut as other manufacturing-heavy markets would.

"Concern would still exist about the short-term impact of the cuts on the federal budget, which is already in a serious deficit," Gnuschke said. "But the long-term payoff for promoting a more flexible and responsive economy could be very positive."

NAM argues that reducing the rate would get rid of a "tax wedge" that makes many business deals economically unfeasible and stops companies from investing the proceeds they would have earned from the sales of assets back into their businesses.

Indeed, the benefits of cutting the capital-gains tax could make the economy more flexible in the long run, Gnuschke added, serving as positive news for reeling U.S. corporations.

NAM's tax-cut proposal didn't make it into the House version of the economic stimulus plan, but the group said it expects legislation to reduce the tax rate introduced next month.